After years of subpar sales results and declining profitability, Kohl's (NYSE:KSS) executives have started to think outside the box as they work to get the company growing consistently once again. Boosting store traffic has been management's main focus.
In this segment from Industry Focus: Consumer Goods, Vincent Shen is joined by senior Motley Fool contributor Adam Levine-Weinberg as they dig into several of Kohl's traffic-driving initiatives. The company is accepting Amazon (NASDAQ:AMZN) returns in some markets and subleasing space to discount grocer Aldi in other locations, as it tests ways to get more shoppers into its stores. Kohl's is also adding new name-brand products from the likes of Under Armour and Fitbit in order to appeal to fitness-conscious consumers.
A full transcript follows the video.
This video was recorded on June 12, 2018.
Vincent Shen: What we're seeing at Kohl's, too, for the second department store that we're looking at here, this was their third consecutive quarter of growing comparable sales. If you read through management comments again, a lot of the initiatives that they mentioned overlap with or echo what we've discussed with Macy's. There's that focus on e-commerce, specifically mobile. They say that makes up 70% of the digital traffic, about half of online sales. Stores apparently fulfilled 30% of digital orders in the first quarter. That's up 5 percentage points from the prior year. They also talk about initiatives like buy online, ship to store. That came up as a traffic driver and an increase to the number of offerings that customers can order and ultimately pick up at Kohl's locations.
Is there anything else on the Kohl's front that really jumped out to you? I know they've announced, in the past year, pretty unconventional partnerships with Amazon, for example, and Aldi. A lot of people are looking at that and scratching their heads, like, is this really the path forward? But so far, management seems pretty happy with results; they appear encouraging. But I'm curious to hear your thoughts on those efforts and anything else that's really jumped out to you.
Adam Levine-Weinberg: Yeah. Kohl's management team has really said that the primary focus has to be on driving traffic. Even by comparison to Macy's, Kohl's really has been quite successful, much more successful in that regard than Macy's. The idea here is that, the more people you have coming into the store, the more purchases will be made. That really is the driver of the in-store economics, making that in-store business model work.
What you've seen from Kohl's is a focus on different initiatives. How can we get more people to come into the store? What's grabbed the most headlines have been these partnerships. With Amazon in some test locations, in Chicago and Los Angeles, Kohl's began accepting returns for Amazon. So you'd buy something from Amazon.com, it comes, you don't want it for some reason. Instead of having to go through the whole return shipping process, which can be cumbersome, or in some cases, you have to pay for the return shipping. If you live in Chicago or Los Angeles, you can go into a Kohl's store, they'll take it from you, you don't have to deal with boxing it up -- really convenient for customers.
To some observers, they say, "Isn't this just going to make people want to shop even more on Amazon, because you've just made it more convenient for them?" That might be true, but more people are shopping with Amazon no matter what Kohl's does. What this means is that now, you have a steady flow of traffic of Amazon customers walking into Kohl's stores. Once they're there, it's pretty convenient to go pick something up if you realize, "Oh, I need underwear, I need a new pair of shoes." Kohl's has all of that right there. So that's been a really interesting idea, and it seems to be pretty successful, to the point where Kohl's wants to roll that out further, and it seems like Amazon is also interested in doing that.
A second big thing for Kohl's was this Aldi partnership, which is really just scratching the surface. They're subdividing a few of their stores to put Aldi grocery stores next door. The idea there is, grocery stores get lots of traffic. People are going there weekly or multiple times a week. And if Kohl's doesn't actually need all of the retail space it has, shrinking the store doesn't really have any downside. And in fact, in many stores, they've changed the fixtures that they use to make the store appear like it's smaller, because they realized, they had these giant stores where they were putting inventory in just to make the store look full, and they didn't really need that much inventory, based on the demand they were seeing.
So, Kohl's has been trying to reduce inventory, use different fixtures. But it really means that, in about half their stores, Kohl's has an opportunity to shrink by 20,000 square feet or so, or even 30,000 square feet, and really have a more optimal store size. That creates room to bring in another tenant where, one, they'll have a rent check coming in every month, which is obviously good for the bottom line. But two, they're hoping that some of those people who are shopping next door at Aldi or another tenant that they might bring in will walk next door and go to Kohl's. So both of those moves are really designed to bring more traffic in.
Aside from those high-profile partnerships, I think we should also mention some of the product partnerships that Kohl's has been investing in. The most notable one was bringing Under Armour in the store last year. That's really helped them build up more credibility in this wellness initiative that they have. With lots of products from Under Armour, Nike, Adidas, all of these brands that are into athletics and wellness, that's helping Kohl's bring more traffic in, maybe a consumer that's not previously been a regular Kohl's customer.
Some of the other things that we've heard about very recently in the last month, are new shops from Lego and FAO Schwarz that are coming in in time for the holiday season to build up toys as a business line for Kohl's. All these brands, obviously, are looking for new distribution, particularly with Toys R Us about to close the last of its stores in the U.S.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Levine-Weinberg owns shares of Kohl's and Macy's. Vincent Shen owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon, Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has a disclosure policy.